Investing Blog

Dow hits a new record, so what?

Start whistling a happy tune because happy days are here again. Right? The Dow Jones industrial average closed at a record high again. On Tuesday, it topped off at 14,559.65. The more relevant index, Standard & Poor's 500 index, closed just 2 points shy of its all-time high of 1565.15 set in October 2007, Reuters reported in Tuesday's story, "Wall Street climbs on economic data; S&P near record close."

There seems to be a lot of preoccupation in the financial media with record highs. Sure, it makes a snazzy headline. But what does it mean?

For proponents of technical analysis, certain prices seem to be harder to break through than others -- either on the way up or the way down. They're known as levels of support or resistance and represent psychological barriers. They tend to be numbers around which investors make decisions either for or against a certain security.

For the rest of us, record highs may not be as significant. The stratospheric heights the indexes are reaching these days indicate two things, according to Robert Barone, chief economist and portfolio manager at Universal Value Advisors in Reno, Nev.

"It tells us one thing for sure: Don't fight the Fed," he says. One side effect, bug or feature of the quantitative easing programs from the central bank has been to inject vast quantities of money into the financial system -- much of which has gone into equities.

"The Fed has liquefied at least the U.S. if not the whole world, and we have a lot of money sloshing around looking for a return," says Barone. Read more about that in "How the Fed fuels stock prices."

Monetary policy may not be the only driver. It could be part of the so-called new normal, the post-financial-crisis reality. Relatively sluggish economic growth may be par for the course now, says Barone. Instead of looking back to 2006-2007 and saying that gross domestic product and unemployment should be at those levels, maybe the economy simply doesn't have the growth potential that it once did.

"Job openings are rising but the jobs aren't being filled. There is a shortage of skilled labor. Capacity utilization in the industrial sector is approaching what it was in '07," says Barone.

"But we're not happy because we have 7.5 percent unemployment, and we think it should be 4 percent or 5 percent. Putting it all together, it tells you that maybe the stock market isn't too high," he says.

What do you think? Is it too high? Where should it be? What's going on? There are so many questions.

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1 Comment

ajallen

March 31, 2013 at 5:28 am

Jobs are NOT coming back to U.S.A. - most went to Asia to lower paying wage workers and will stay there. The U.S. is beginning what my father called the decline into a second rate nation ( very similar to most European countries ) - we still have some natural resources to help stabilize prices for the short term but these avenues are being thwarted by various groups whose motives may be good but stifle economic growth. The ENTIRE American public will have to take a haircut on our standard of living if we intend to stay competitive with the rest of the world. There are so many countries with labor populations that are HUNGRY for jobs that I see jobs going out of the U.S. for the forseeable future. The U.S. is becoming a "service industry " job creator and that can last only so long until we owe China our soul !!!!!!

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